UPDATE 2-Britain borrows more, threatening new budget target

Reuters Staff

5 Min Read

* Monthly borrowing up at 15.4 bln pounds, just above f'cast
* Overall borrowing still rising according to most-used
measure
* Targets revised in December already under threat
* Growing doubts over AAA credit rating
By Patrick Graham and Olesya Dmitracova
LONDON, Jan 22 (Reuters) - Britain's government borrowed
slightly more than expected in December as the economy continued
to struggle, thwarting efforts to erase a large budget deficit
and adding to pressure on the country's top credit rating.
Just over a month after official borrowing forecasts for
2012-13 were revised, economists said the figures showed the
finance minister, George Osborne, was almost certain to miss his
new annual target, further endangering a deficit-cutting drive
that is already running two years behind.
The government's preferred measure of public sector
borrowing rose to 15.419 billion pounds in the month from 14.848
billion pounds a year earlier, just above a forecast of 15.2
billion pounds.
It was mainly due to a poor growth in revenues, which will
bolster criticism that the government has cut too hard and too
fast in the public sector to allow the economy to grow.
But there were also worrying signs that, with unemployment
rising, spending is growing faster than expected, by 5.4 percent
on the year compared with a 3.6 percent rise in revenues.
There are a number of windfalls likely to flow into state
coffers before the financial year ends in early April, but the
most-used measure of borrowing is already 2 billion pounds
($3.17 billion) short of the 2012-13 target set in December.
"We're still trying to work out how the government believes
they're going to meet their borrowing requirement this year,"
said Tom Vosa from National Australia Bank in London.
"They still seem to be some way off from the target
announced in (December)."
The Office of Budget Responsibility, a budget watchdog, said
after the data it was still hopeful that the target it set in
early December could be met.
It hopes for 3.5 billion pounds from the sale of 4G mobile
phone frequencies and another 11.5 billion pounds from the
transfer of coupon payments on gilts (bonds) bought by the Bank
of England back to the finance ministry.
But while tax receipts in coming months will be bolstered by
income tax returns, the OBR's hopes of a faster rise in revenues
than seen so far are set against growing speculation that the
economy may be slipping back into recession.
Deutsche Bank economist George Buckley said his calculations
showed the deficit would overshoot by 22.5 billion pounds to
reach 131 billion pounds if fiscal performance did not improve
in the final three months.
FEEBLE
Excluding another one-off effect -- the absorption of Royal
Mail employees' pension savings -- the target most economists
are using for borrowing stands at 106.5 billion pounds, up 7.3
percent this year.
Osborne, the chancellor of the Exchequer, had imposed tough
spending cuts and tax rises in a bid to eliminate Britain's
structural budget deficit -- the shortfall that would remain if
the economy were operating at full steam -- by the next election
in 2015.
But feeble economic growth has derailed that plan and pushed
back the deadline to 2017. There is widespread speculation among
financial market analysts that Britain in the meantime could
lose its triple-A credit rating after the budget announcement in
late March.
That would risk raising the cost of servicing debt, which
now amounts to 70 percent of Gross Domestic Product and as much
as twice that taking account of banking bailouts.
"The question is how long the UK can hold onto its AAA
status," said James Knightley, economist at Dutch bank ING.
"With the United States and France having been downgraded by
one ratings agency, another disappointing borrowing number and
a widely expected contraction in fourth-quarter GDP on Friday
will intensify the threat of the UK suffering the same fate."
While there remains a strong consensus in favour of cuts to
the public sector -- and indeed on the right for deeper cuts --
a raft of economists believe that Osborne should have held off
with some of the austerity until other sources of growth for the
economy had more time to recover.
"I think the Chancellor is overly aggressive in his plans on
austerity at present," Adam Posen, a policymaker at the Bank of
England until his departure in August, told a parliamentary
committee.
"But you have to take the lesson from Japan that when times
get good again...you have to consolidate. You have to pay
attention to the (economic) cycle, which cuts both ways."